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html# Porters Generic Strategies

Porter's Generic Competitive Strategies (ways of competing) A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, Focus. The focus strategy has two variants, cost focus and differentiation focus. 1. Cost Leadership In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average. Some writers posit that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. However, this takes a limited industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs. For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage. Innovation of products or processes may also enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have become too high. An example is the success of low-cost budget airlines who despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents. To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labour, or some other important input. Without one or more of these advantages, the strategy can easily be mimicked by competitors. Successful implementation also benefits from:

process engineering skills products designed for ease of manufacture sustained access to inexpensive capital close supervision of labour tight cost control

incentives based on quantitative targets.

always ensure that the costs are kept at the minimum possible level. Examples include low-cost airlines such as EasyJet and Lidl. 2. Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles. Differentiation involves creating a product that is perceived as unique. The unique features or benefits should provide superior value for the customer if this strategy is to be successful. Because customers see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more brands loyal. This can provide considerable insulation from competition. However there are usually additional costs associated with the differentiating product features and this could require a premium pricing strategy. To maintain this strategy the firm should: strong research and development skills strong product engineering skills strong creativity skills good cooperation with distribution channels strong marketing skills incentives based on subjective measures be able to communicate the importance of the differentiating product characteristics stress continuous improvement and innovation attract highly skilled, creative people

Differentiation may be attained through many features that make the product or service appear unique. Possible strategies for achieving differentiation may include:

warranties (e.g., Sears tools) brand image (e.g., Coach handbags, Tommy Hilfiger sportswear) technology (e.g., Hewlett-Packard laser printers) features (e.g., Jenn-Air ranges, Whirlpool appliances) service (e.g., Makita hand tools) quality/value (e.g., Walt Disney Company) dealer network (e.g., Caterpillar construction equipment)

3. Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. In this strategy the firm concentrates on a select few target markets. It is also called a focus strategy or niche strategy. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for relatively small firms but can be used by any company. As a focus strategy it may be used to select targets that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on.

Criticism: Several commentators have questioned the use of generic strategies claiming they lack specificity, lack flexibility, and are limiting. In particular, Miller (1992) questions the notion of being "caught in the middle". He claims that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. According to Baden-Fuller and Stopford (1992) the most successful companies are the ones that can resolve what they call "the dilemma of opposites". A popular post-Porter model was presented by W. Chan Kim and Rene Mauborgne in their 1999 Harvard Business Review article "Creating New Market Space". In this article they described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions. Their approach fundamentally goes against Porter's concept that a firm must focus either on cost leadership or on differentiation. They later went on to publish their ideas in the book Blue Ocean Strategy. GENERIC STRATEGIES AND THE INTERNET Porter asserts that these generic competitive strategies were not only relevant for the old economy, but are just as vital today. Indeed, he goes on to say that terms such as "old economy" and "new economy" may be misguided, and the concept of a firm's Internet operation as a stand-alone entity preclude the firm from garnering important synergies. Furthermore, the Internet may enhance a firm's opportunities for achieving or strengthening a distinctive strategic positioning. Therefore, effective strategy formulation at the business level should pay off, not in spite of the Internet, but in concert with it. Porter describes how companies can set themselves apart in at least two ways: operational effectiveness (doing the same activities as competitors but doing them better) and strategic positioning (doing things differently and delivering unique value for customers). "The Internet affects operational effectiveness and strategic positioning in very different ways. It makes it harder for companies to sustain operational advantages, but it opens new opportunities for achieving or strengthening a distinctive strategic positioning." Although the Internet is a powerful tool for enhancing operational effectiveness, these enhancements alone are not likely to be sustained because of copying by rivals. This state of affairs elevates the importance of defining for the firm a unique value proposition. Internet technology can be a complement to successful strategy, but it is not sufficient. "Frequently, in fact, Internet applications address activities that, while necessary, are not decisive in competition, such as informing customers, processing transactions, and procuring inputs. Critical corporate assetskilled personnel, proprietary product technology, efficient logistical systemsemain intact, and they are often strong enough to preserve existing competitive advantages." Consistent with the earlier discussion regarding combination strategies, Kim, Nam, and Stimpert found in their study of e-businesses that firms pursuing a hybrid strategy of cost leadership and differentiation exhibited the highest performance. These authors concluded that cost leadership and differentiation must often be combined to be successful in e-business. Porter's generic business strategies provide a set of methods that can be used singly or in combination to create a defendable business strategy. They also allow firms that use them successfully to gain a competitive advantage over other firms in the industry. Firms either strive to obtain lower costs than their competitors or to create a perceived difference between their product and the products of competitors. Firms can pursue their strategy on a national level or on a more focused, regional basis.

Clearly, Michael Porter's work has had a remarkable impact on strategy research and practice. The annual Porter Prize, akin to the Deming Prize, was established in 2001 in Japan to recognize that nation's leading companies in terms of strategy. Porter's ideas have stood the test of time and appear to be relevant both for profit-seeking enterprises and not-for-profit institutes in a variety of international settings. Torgovicky, Goldberg, Shvarts, and Bar Dayan have found a relationship between business strategy and performance measures in an ambulatory health care system in Israel, strengthening Porter's original theory about the non-viability of the stuck-in-themiddle strategy, and suggesting the applicability of Porter's generic strategies to not-for-profit institutes.